Page 3 - When Client Relationships Don't End Amicably

COLUMNS I Tax Practice & Procedure

Kent filed for bankruptcy and sued the able. That is, one can breach a contract The executed contract between Kent
firm for, among other things, breach even if there is no written agreement. and the firm—which the court concluded
of contract. An implied contract cannot exist also covered the period of time before its
where an express agreement covers formal execution—included the follow-
The Case the same subject matter. Embarking ing provision: “You [Kent] agree to
By the time a formal contract was on work without a written contract provide all financial and nonfinancial
executed, the firm had already completed creates risk that future disputes about information and documentation rea-
roughly two months of intensive work for an agreement’s terms, or whether sonably deemed necessary or desirable
Kent. What, then, was the relationship the agreement existed at all, will be by us in connection with the engage-
between Kent and the firm prior to the resolved not by looking to an executed ment.” It was abundantly clear from
execution of the formal agreement? document, but instead by evaluating the evidence that the firm repeatedly
The court determined that the exe- the evidence of the parties’ relation- sought information from Kent that was
cuted agreement was simply confirma- ship. That evidence may not always necessary to create general ledgers and
tion of a contractual relationship that be clear, or in the accountant’s favor. prepare tax returns, but Kent was unable
already existed. In other words, the This recognition of an implied contract to provide that information. The court
conduct of both parties demonstrated highlights the importance of establish- also credited the CPA’s testimony that
that an implied contract was in effect ing the ground rules governing the filing any tax returns based on incom-
between the firm and Kent during accountant-client relationship early, plete information would have breached
March, April, and May. The phrase and in an executed writing. the CPA’s ethical obligations. [See
Circular 230 section 10.22 (requiring
Embarking on work without a written con- diligence as to accuracy); IRC section
6694 (prohibiting unreasonable position
tract creates risk that future disputes about on returns).] Although the firm did not
provide Kent with the work product he
an agreement's terms, or whether the sought, that did not constitute a breach
of contract given Kent’s own conduct.
agreement existed at all, will be resolved The firm’s successful defense against

not by looking to an executed document, Kent’s breach of contract claim under-
scores the importance of a thought-
but instead by evaluating the evidence fully drafted agreement. It is important
to specify the client’s obligations as
of the parties' relationship. early as possible, in writing. Before
undertaking particularly complex or
novel assignments, one should consider
which information will be necessary,
“implied contract” says it all—when The key question in Kent was and who will be responsible for fur-
the facts demonstrate that the parties whether the CPA firm breached its nishing that information. Once work
formed an agreement, such an agree- contract by not finishing the work it is underway, requests for information
ment exists; it is implied, even if not undertook and providing Kent with should be made clearly and, if possible,
reduced to a formal writing. The court that work product. The court held that in writing. If a dispute emerges later, a
noted that, absent some unusual cir- there were two independent bases for clear written record showing what was
cumstances, common sense dictates finding the firm did not breach its done to attempt to obtain information
that when someone seeks professional contract. First, Kent’s own breach of will always be preferable to reliance
services from an accounting firm, there contract—failure to deliver enough on memories of acts and conversations.
is a concomitant promise by the client information for the firm to do its job
and expectation by the firm that pay- ethically and professionally—prevented Additional Lessons Learned
ment will be made for those services. the firm from upholding its end of the Although it was Kent’s failure to
The important point is that, if an bargain. Second, Kent had voluntarily fully satisfy his invoices that eventu-
implied contract exists, the duties paid some (though not all) of the fees ally convinced the firm it needed to
owed under that contract are enforce- that he owed the firm. end the relationship, Kent did make

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